Constraints on Development Essay

Question: Evaluate the causes of underdevelopment in LDCs.

A major constraint on development in LDCs is primary product dependency. Primary commodities include wheat, sugar cane, cocoa and bananas. LDCs that are dependent on producing and exporting primary commodities encounter may suffer from low export revenues. As primary commodities have an inelastic price elasticity of supply, a demand shock causes a significant price change. Additionally, because primary commodities have an inelastic demand, a supply shock also causes a significant price change. Because of these inelasticities, demand and supply shocks may cause primary commodity prices and revenue to fluctuate wildly. A fall in demand or an increase in supply will cause primary commodity prices to fall significantly. This is bad for LDCs because lower primary commodity prices means lower export revenues (and foreign currency) and less revenue for farmers and producers so living standards fall. Between 1985-1994, declining commodity prices cost Sub-Saharan Africa roughly $80bn in lost export revenues.

However, producing and exporting primary commodities may not be a major constraint on development because an LDC may export a large amount of commodities, it can then use the export revenues to develop its roads, ports, railways and utilities or invest in healthcare and education. Moreover, maybe the LDC could use export revenues to develop other sectors of the economy and diversify so the LDC becomes less reliant on exporting primary commodities. For example, Dubai re-invested oil export revenues to develop its tourist sector. Also, an LDC could focus on exporting primary commodities in the short-run and invest in its manufacture sector to change its comparative advantage in the long-run. For example, in the 1960s, South Korea changed its comparative advantage from rice production to manufacture goods like Samsung.

Another constraint on development in LDCs is poor infrastructure. An economy’s infrastructure includes roads, railways, ports, utilities (electricity, water and gas) and telecommunications. A poor infrastructure harms development because it decreases productivity. As the quality of an economy’s roads, railways, airports and ports worsens, transport costs rise and productivity declines. So the PPF, productive capacity and output are constrained. Lower output means lower economic growth and less goods and services available for consumers so lower living standards. Japan developed Taiwan’s roads, ports and railroads during colonial rule (1905-1945), thisacted as a growth pole for industry from the 1950s. Also, poor infrastructure means less exchange. As the quality of telecommunications worsens, exchange costs rise and agents are disincentivized to trade so AD falls. Additionally, poor infrastructure discourages MNCs from entering the economy. If utilities are poor then electricity costs are high and there may be unpredictable black-outs, so domestic firms may not invest and MNCs may be deterred from entering the country. So investment is constrained and the potential for growth and development is constrained.

But, poor infrastructure may not be a major constraint on development because LDCs may be able to upgrade their infrastructure quicker than HICs did in the past. For example, LDCs could jump straight to fibre optic cables to provide the most efficient internet. In addition to this, MNCs may still be attracted to LDCs to take advantage of cheap labour or weaker environmental laws even if the infrastructure is poor. Furthermore, maybe other factors are more important development constraints. For example, a civil war means the LDC’s population is fighting so investment is disincentivized no matter the quality of the infrastructure.

A third reason why LDCs remain underdeveloped is population growth. Many LDCs’ birth rates are significantly higher than their death rates, so their population growth is rapid. A high population growth negatively impacts on economic development because it creates food shortages. Thomas Malthus posits that food supply only increases arithmetically (2, 4, 6, 8 … ) but population increases geometrically (2, 4, 16, 256 … ). Eventually population growth overtakes the growth in food supply. Also, maybe farmers cannot keep using new technology to increase crop yields because there is a limit to how much they can fertilize and develop new strains. Additionally there may be a limit on how much food the planet can provide. Resultantly, the population soon begins to run out of food, some people do not eat enough food so their calorie intake falls and living standards fall. Many people live at subsistence level, eating just enough to survive. Large famines could arise where many people starve and die.

Although, in developed countries there does not seem to be any problem of food shortages as average daily calorie intake has increased over the years. Also, the US, Canada and EU have been limiting their agricultural production so there is scope to provide more food for the planet. Moreover, Amartya Sen asserts that people may be starving because they do not have the money or access/entitlement to buy food, not because there is not enough food available.

Lastly, another cause of underdevelopment in LDCs is foreign debt. An economy’s development may be restricted by an unsustainable amount of foreign debt because of the opportunity cost that it entails. A large foreign debt in terms of GDP means the country must pay a high rate of interest (debt service), so funds are diverted away from spending on the domestic economy. Between 1980- 1990, Sub-Saharan Africa’s external debt rose by 163%. This resulted in the ‘lost decade of growth’ as domestic spending was diverted towards debt service. GDP per capita fell by 2.5%, consumption per capita fell by 40% and investment fell by 29.7%. Also, foreign debt leads to a poor credit rating. Maybe debt is so high that the country has a low credit rating and cannot borrow more money, then it may need to divert even more spending away from the domestic economy. Advanced economies may even lose their AAA credit rating if they run up large unsustainable foreign debts for example the US economy in 2011.

On the other hand, foreign debt may not be a major constraint on development because most countries have foreign debt, debt is only a problem when it becomes unsustainable. Furthermore, it may be necessary for an LDC to get into debt first to raise funds for development. After investment has come to fruition the debt can be repaid. Also, an LDC could get into debt and seek debt cancellation.